A djungle of definitions of growth
The question of what drives economic growth and development has puzzled economists for decades. For a long time, the dominant view was that it was large corporations that drove the development of new markets and industries. This view was later challenged by economist David Birch, who coined the term "gazelles" to describe small and medium-sized enterprises that account for a disproportionately large share of new jobs.
There are numerous ways to measure growth as there are several criteria to decide upon. This leads to an incomplete overall picture of which fast-growing companies, or High Growth Firms (HGFs - an abbreviation we use in this report) and potential HGFs are, which in turn leads to the policy debate being conducted on loose grounds. The coexistence of several definitions of growth also leads to the identification of a plethora of growth animals such as unicorns, camels, and elephants.
In this report, we review different approaches used to identify HGFs and discuss the pros and cons associated with them. We also show the variation in the identifying group of HGFs based on a variety of definitions of growth in terms of their characteristics such as size, age, industry affiliation, geographic distribution, education level of employees and management, and gender distribution. We also show the variation in terms of job creation. By doing this, we get a good picture of the HGFs that operate in Sweden today.
We find that there is a high correlation between the group of definitions that are based on absolute change and the group of definition that are based on Birch Index. We also find that that differentiating the formula in several cases results to higher correlations level compared to deafferenting of growth processes or time interval. The choice of growth indicators also affects the characteristics of the identified HGFs for instance as to how many they are or where they are located.
Our results suggest that the choice of growth process (organic and total) affects the characteristics of HGFs in terms of size and age. Even though HGFs come in all sizes and ages, there are more small firms that experience high total growth and more larger firms that experience high organic growth. Similarly, a larger set of young firms experiences high total growth and a larger set of mature firms experiences high organic growth.
The choice of growth definition affects tremendously the geographic distribution of HGFs across counties. However, most definitions show Stockholm, Skåne och Västra Götaland as counties with high intensity of HGFs.
The choice of definition, as expected affects, the identification of specific growth animals. Using percentual change leads to a high share of small firms (mice) while the use of absolute change leads to a high share of large firms (elephants). Similarly increasing the time interval from three to ten years can potentially lead to identification of elephants or camels (firms who are able to "survive in droughts” and follow a path that involves a lower growth rate).
Our findings also suggest that HGFs not only grow faster than other firms in the economy, but they also maintain the ability to grow during a period of recession. During 2017-2020, the total employment in the economy decreased by approximately 4000 employees, but HGFs increased significantly in employment, net turnover and value added.
The role of the state when it comes to HGFs is unclear, contested and surrounded by potential conflicting goals to be considered. The purpose of the partial study is to create better conditions for clarity in the Swedish policy debate and it is the first study within the project “Is Sweden and the EU an (un)favorable environment for fast-growing companies?”
A djungle of definitions of growth
Serial number: Rapport 2023:03
Reference number: 2021/68